Bright spark in Southern Cross

Southern Cross Electrical Engineering
(SXE) listed on the Australian Securities Exchange in 2007, but the company’s operations as a provider of large-scale specialised electrical, control and instrumentation installation and testing services date back to 1978.

Unfortunately, Southern Cross Electrical’s ASX debut coincided with the beginning of the collapse in equities markets.

As the global financial crisis unfolded, negative sentiment and a lack of access to funds affected many of Southern Cross Electrical’s end markets. But this had little impact on Southern Cross Electrical, as the company exceeded prospectus forecasts, and has since continued to achieve strong profit growth.

Central to Southern Cross Electrical’s success has been management’s ability to position the company to take advantage of emerging trends. Of equal importance has been the company’s strong reputation that resulted in it maintaining a high level of work despite some of its clients, such as, Rio Tinto pulling back on projects at the height of the global financial crisis.

Southern Cross Electrical has a strong relationship with Rio Tinto, and in 2008-09 revenues from the company’s involvement in the Cape Lambert and Hope Downs iron ore projects accounted for approximately 50 per cent of income. Southern Cross Electrical’s other main project during this period was in Tanzania where it provided a range of electrical services for Barrick Gold.

Related Quotes

Company Profile

One of the most impressive features of Southern Cross Electrical’s performance to date has been the extremely strong margins that the company has been able to achieve. Generally speaking, companies involved in providing services to the mining sector have faced significant margin pressure since 2008.

In 2008-09, Southern Cross Electrical achieved revenue to earnings before interest and tax margins of more than 20 per cent, well above those achieved by the general contracting industry even in good times.

On Monday, we spoke to the managing director of Southern Cross Electrical, Mr Stephen Pearce, with a view to identifying what sets his company apart from other industry participants, and to gain an insight into the company’s short to medium-term outlook.

Last week Southern Cross Electrical announced that it had been awarded a contract by Woodside in relation to the Pluto LNG project that involved electrical and instrumentation work to the value of approximately $35 million.

Mr Pearce said that the competition for this project, as is the case with many others that Southern Cross Electrical bids for, were likely to have been large diversified engineering and contracting companies Downer EDI and Thiess Kentz.

Southern Cross Electrical’s ability to identify emerging opportunities was demonstrated in June when the company acquired FMC Corporation, operator of the Hindle Offshore Services and Hindle Electrics electrical maintenance businesses.

This acquisition was not just instrumental in the company winning the recent Woodside contract, but it is likely to provide other opportunities in the lucrative offshore oil and gas sector.

The addition of the Hindle group of businesses for a final consideration of approximately $5 million reflected well on management’s ability to recognise opportunities that add shareholder value. The acquisition price of the Hindle business represented an earnings before interest and tax multiple of approximately three, a real bargain given Southern Cross Electrical’s margins.

The company went on to make another acquisition, that of KJ Johnson, a powerline construction services business that has significantly expanded Southern Cross Electrical’s position in that sector. But Mr Pearce said that the company was not getting too carried away with making acquisitions, and that the focus was on achieving organic growth and efficiently executing its range of projects in Australia and overseas.

While Mr Pearce did not provide firm guidance for 2009-10, the company is off to a good start having won contracts to the value of $75 million in the first quarter. Given that the company’s full-year revenues for 2008-09 were $100 million, this represents a strong start to what is shaping up as another impressive year.

Based on consensus forecasts for 2009-10, Southern Cross Electrical’s price-earnings ratio is approximately 10. While this is broadly in line with the company’s sector peers, most of its competitors don’t achieve the same margins as Southern Cross Electrical.

Management’s interests are strongly aligned with the performance of the company. Chairman, Mr Frank Tomasi’s shareholding represents a stake of more than 50 per cent and the company is well supported by larger institutions such as Acorn Capital, Hunter Hall and Aviva Investors Australia.